Clifford Chance

This article focuses on the main risks that NFTs represent from a copyright perspective, covering recent case law established by the Spanish courts on copyright infringement by the creation and making available of NFTs.

Non-Fungible Tokens (NFTs) have rapidly disrupted the market as digital assets consisting of original contents (such as images, videos or music files) which can be traded using a blockchain network. Blockchain networks facilitate NFTs commercialization through online platforms such as OpenSea with the use of smart contracts that include the transfer of ownership rights and establish the applicable royalty fees. Buyers can purchase NFTs on such platforms using cryptocurrencies, in a way that ensures that the NFT is unique, verifiable and inalterable. This has raised particular interest in the art world, as they can be used to securely sell digital art pieces, although they can also be used for other digital assets such as sports collectibles, virtual real estate, and even tweets (former Twitter CEO Jack Dorsey sold his first tweet as an NFT for $2.9 million in March 2021).

One of the key aspects of NFTs is precisely the fact that the author of a unique artistic work can create a digital "twin" (reproduction) of such piece, therefore retaining ownership of the original source, plus the additional ownership of the subjacent digital copy that is the NFT. In other words, NFTs can coexist with their "real world" sources of origin in an independent ownership regime, although intrinsically linked with each other. If the "real world" artistic work is copyright protected, so will be the NFT. Therefore, NFTs allow the creation of a digital "duplicate" of their "real world" source (both sources being unique, verifiable and inalterable), making it possible to sell them in different markets and gain additional income, which is something that was previously not commercially feasible, as it was practically impossible to verify which was the original digitalized copy of a given artwork and it was easy to make additional unlawful copies (i.e., without the authorisation of copyright holders) due to the lack of tracing capabilities.

Notwithstanding their clear advantages, as with any disruptive change, it has not taken long for disputes to arise. Particularly in Spain, disputes over NFTs have recently been brought before the Spanish courts, in a copyright infringement claim against the Spanish multinational fashion company Punto Fa, S.L. (owner of the trademark "Mango"), in which the Spanish collecting society for plastic artists (VEGAP) argues that Mango has committed an act of infringement of the copyright (moral and exploitation rights) of the Spanish artists Joan Miró, Antoni Tàpies and Miquel Barceló, by converting five of their plastic works to an NFT without their consent, despite the fact that Mango rightfully acquired such paintings in 1998. This has been the first time that Spanish courts have ruled on a case regarding NFTs, therefore establishing the first precedent in Spain regarding NFTs as a legal category.

In a nutshell, the main dispute heard in the mentioned proceedings concerns the extent to which Mango, as the rightful owner of the paintings, can commercially exploit them. According to the Spanish Copyright Act, the acquirer of the ownership of the medium in which a work of art has been created shall not have, by this sole title, any copyright over such work. However, it also establishes that the owner of the original of a plastic work shall be entitled to publicly exhibit the work, unless the author has declared this right expressly excluded, in the act of disposal of the original. In this regard, Mango exhibited the paintings at the opening of its Fifth Avenue store in New York, making use of the before-mentioned right of exhibition (which was not argued by the claimant), but also created NFTs of the five paintings and published them on the OpenSea and Decentraland digital platforms.

According to VEGAP, this second act entailed an infringement of the authors' copyright, consisting of unauthorized acts of reproduction, transformation and making available to the public that encroach upon their moral rights of integrity and divulgation over the works, and so it petitioned the court to declare such act an infringement, order Mango to cease using the works in this way, and award damages. The claimant also applied for a preliminary injunction, seeking an order to cease using the NFTs and to remove them from the digital platforms, which was partially awarded and directed at the OpenSea platform, as the court considered such platform to be vulnerable to cyberattacks that could result in the theft of the NFTs. OpenSea was ordered to dispose of the NFTs under the court's custody, in a digital wallet of the claimant's choice.

Although a decision on the matter is currently still pending, the court has anticipated that due to the unprecedented and complex nature of the case, there are doubts as to Mango's right to create as, or "transform" the original works into, NFTs without their authors' authorization.

Thus, this case raises a very important question: does ownership over the medium in which a work of art has been created include the copyright to create an NFT of said work and upload it to a digital platform such as OpenSea? Mango's legal defence sustains that the creation and diffusion of said NFTs did not constitute a copyright infringement, as it constituted a 'fair use' and did not require the authors' permission in order to be performed.

When interpreting the nature of a 'fair use' of a work subject to copyright, the Spanish Supreme Court's judgment dated 3 April 2012 (judgment 172/2012; Google Spain) established that when applying limitations to copyright, the court must assess whether the disputed exploitation of the work: (a) can cause any harm to the author's legitimate interests or jeopardise the normal exploitation of the work; or (b) whether such disputed use goes in favour of the author's interests and the normal exploitation of the work.

According to the Supreme Court, if the latter were to occur, any claim under the closed system of limitations and exceptions to exploitation rights provided in the Spanish Copyright Act would lack protection.

We will have to wait for the Spanish court's decision in order to know the answer to the previously-raised question.

Whatever the result might be, it is clear that such decision will set a historic precedent in Spain regarding NFTs, establishing whether and, if so, to what extent the owner of a work of art's medium can conduct acts of exploitation over the digital "twin" of an original plastic work and under which legal basis.